Foundries embroiled in capex 'arms race'

SAN JOSE, Calif. -- Several years ago, the silicon foundries tended to announce and build fabs on a whim in order to stay one step ahead of their rivals.

It was a reckless practice, as many vendors built fabs in spite of the IC downturns. But in recent times, the foundries have become more conservative in capital spending as a means to avoid dreaded capacity gluts.

Now, many foundries appear to be reverting to past tactics. Many foundry vendors are engaged in a capital spending war or "arms race," said C.J. Muse, an analyst with the Barclays Capital, in a new report.

Three vendors--GlobalFoundries, Samsung and TSMC-- appear to be engaged in a new capital spending race in an effort to gain share in current and future cycles. The trends could be a problem for the other digital foundries, such as SMIC, UMC and others, many of which cannot keep up with the spending race and will likely fall behind the curve.

The question is clear: Who will be left standing when it's all said and done? TSMC, GlobalFoundries and Samsung will survive, observers said. UMC and SMIC could hit the wall and/or may get acquired, they added.

''We have been advocating for some time that meaningful foundry spending, initiated by TSMC’s earlier yield problems, continues to be sustained by the emerging foundry arms race,'' Muse said. ''This competition is fueled by the disruptive presence of technically competent GlobalFoundries with a working 32-nm process and Samsung’s growing presence through its System LSI business, having recently won away Xilinx business from UMC/Toshiba.''

The analyst was referring to Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC), which had problems ramping up its 40-nm process due to yield issues. TSMC claims that the problem has been resolved.

As reported earlier this year, Xilinx Inc. said it will use leading foundry TSMC as one of two foundry suppliers for its 28-nm FPGAs, a major strategy shift that has been the subject of industry rumors and analyst speculation for weeks.

Xilinx (San Jose, Calif.) said it is using TSMC and Samsung Electronics Co. Ltd.'s foundry division to make 28-nm parts. Xilinx' shift to TSMC is a bitter pill for rival foundry United Microelectronics Corp. (UMC), which has been a foundry supplier to Xilinx for more than a decade.